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WORDS of appreciation from the central bank for Punjab and Sindh for collecting a much higher amount of revenue from provincial sales tax on services than previously mobilised by the Federal Board of Revenue, must encourage federating units to build their case for transfer of sales tax to them on goods in the next National Finance Commission Award.

In its second quarterly report for the current fiscal, the State Bank of Pakistan reports that the provincial resource mobilisation had registered a sharp growth in their tax revenues, which rose by 89.7 per cent to Rs70.7 billion from Rs37.2 billion a year earlier.

This compares with just 8.6 per cent growth in federal tax revenues to Rs942 billion from Rs867 billion during the same period.

A part of the increase in the provincial tax revenues came from the stellar growth of 110 per cent in case of Punjab, and 79 per
cent in case of Sindh, in the mobilisation of sales tax on services in the first half of the year, despite it being a new tax for both the provinces. This prompted the central bank to remark: “This growth (in sales tax on services) shows that the provinces are perhaps better placed to mobilise this type of tax compared with the Federal Board of Revenue (FBR)”.

Both Punjab and Sindh have not only raised their revenue from sales tax on services, but also saved on mobilisation charges, which were reduced to two per cent of the total collection in the last National Finance Commission (NFC) award from five per cent that had been deducted by the FBR since 2000. It was only during the negotiations on the last NFC award that the federal government agreed to the demand of the provinces to allow them this tax, as provided in the constitution.

Sindh began collecting sales tax on services from the last financial year, and Punjab from this year.

“The view that the provinces should be assigned a bigger role in tax collection has gained currency in the recent years because of FBR failure to meet the tax revenue target every year,” Iftikhar Qutub, chairperson of the Punjab Revenue Authority told Dawn last week.

He argues that provinces are closer to existing and potential taxpayers, and require bigger amounts of revenue to meet the substantial increase in their expenditure in the wake of devolution of several federal ministries, departments and functions following the passage of the historic 18th Amendment and undertake socio-economic development.

Moreover, the provinces are more focused on tax collection as compared to the FBR, which is plagued by mismanagement, misuse of power and lack of transparency.

Tax experts fully endorse the idea of transfer of indirect taxes on consumption of goods to the provinces to financially empower
the federating units and raise the tax-to-GDP ratio. They dismiss the FBR’s ‘propaganda’ that provinces do not have the capacity to handle such taxes as a ruse to maintain its control over tax collection.

“The provincial performance in the case of sales tax on services completely belies the impression that provinces do not have the capacity to collect larger, revenue generating taxes,” contends Ikram-ul-Haq, a leading Lahore-based tax consultant and author.

Sales tax on goods is a provincial levy in many countries, including Canada, the United States and India, where provinces/states have the exclusive right to implement taxes on transactions of goods and services within their geographical boundaries.

The Government of India Act 1935 also had the same arrangement. It was, however, temporarily changed after the inception of
Pakistan, when the Constituent Assembly in 1948 gave the right of levying and collecting sales tax on goods to the centre.

Experts find the existing distribution of taxation rights between the federation and the federating units as injudicious – a major cause of tension between the centre and the provinces. They also feel that the 7th NFC Award, which substantially raised the provincial share in the federal divisible pool of taxes, had failed to comprehensively address the issue of financial autonomy for the provinces.

“The issue is not that of vertical or horizontal distribution of resources, but of giving the provinces autonomy, including the exclusive right to levy taxes on goods and services emanating within their territories, and having full control over their resources,” argues Ikram.

He is of the view that if the provinces can handle sales tax on services, they can also collect sales tax on goods. The federal government has no business keeping it with the FBR. “Sales tax on all services and goods produced and transacted in a province should be its own to keep. Similarly, sales tax on imports should also go to the provinces. The centre should collect only customs/import duties etc,” he insists.

While he advocates for the transfer of sales tax on goods to the provinces, Ikram finds it hard to understand the logic behind making tax on income from agriculture a provincial subject. “The centre should have the right to collect all types of income tax, including the tax on agriculture. And the provinces should have the right to levy sales tax on all types of goods and services.”

“Thus, the centre should give sales tax on goods back to the provinces in exchange for the right to levy income tax on agriculture. It will end many distortions in the country’s tax system, as the federating units have the right to levy indirect taxes on goods and services according to their needs, and the centre to levy income tax on all kinds of incomes to achieve uniformity at the national level.”

Unless a new, judicious distribution of taxation rights between the federation and its units is implemented, the provinces will continue to remain hugely dependent upon federal transfers. Even so, the transfer of sales tax on goods will not address their revenue needs.

The provinces will also have to implement measures to effectively tax the untaxed and the under-taxed sectors of the economy, like property, which fall within their jurisdiction, to raise revenues for development as well as to help the centre cut its budget deficit.